Market Insights: Monday, January 6th, 2025

Market Overview

U.S. stocks advanced on Monday as a rally in semiconductor stocks led the tech-heavy Nasdaq to a 1.2% gain, outpacing other major indices. Nvidia surged over 3% to close at a record high after its server partner Foxconn announced strong revenue and robust AI-driven sales projections. Micron Technology followed suit, climbing more than 10%. The S&P 500 edged higher by 0.5%, while the Dow Jones Industrial Average slipped 0.1%, reflecting a rotation into growth sectors. Markets are gearing up for the December nonfarm payrolls report, delayed to Friday, which is expected to provide fresh insights into labor market conditions. Investors are also watching Nvidia CEO Jensen Huang’s keynote at the CES tech conference for updates on the company's AI initiatives. Meanwhile, Bitcoin broke above $102,000, driven by optimism in cryptocurrency markets. With the first full trading week of 2025 underway, cautious optimism persists amid key economic data releases and lingering macroeconomic uncertainties.

SPY Performance

SPY closed at $595.41, rising 0.58% on the day. Opening at $596.24, it reached an intraday high of $599.70 before pulling back slightly. Trading volume was below average at 41.91 million shares, reflecting subdued participation despite the market's bullish tilt. SPY’s ability to maintain levels near $595 positions it at a pivotal point heading into key economic data this week.

Major Indices Performance

The Nasdaq led Monday’s gains with a 0.96% rise, driven by strong performances in chip stocks such as Nvidia and Micron Technology. The S&P 500 followed with a 0.5% gain, bolstered by tech and growth sectors. The Russell 2000 added a marginal 0.03%, indicating modest interest in small-cap stocks. The Dow Jones underperformed, slipping 0.23% as defensive sectors lagged. Sector rotation into technology underscored a continuation of the momentum from last week’s rally, even as concerns about elevated Treasury yields and economic data releases tempered broader enthusiasm.

Notable Stock Movements

Nvidia and Meta Platforms stood out in Monday’s trading, with Nvidia climbing 3.4% to close at a record high and Meta adding 4.2%. Micron Technology also saw double-digit gains of over 10% following upbeat revenue guidance. Among the "Magnificent Seven," performance was mixed, with these leaders reinforcing their role as sentiment drivers. The spotlight remains on Nvidia as its CES keynote may further shape investor expectations for the semiconductor and AI industries.

Commodity and Cryptocurrency Updates

Crude oil declined 0.66%, closing at $73.44, as concerns over demand weighed on prices despite easing recession fears. Gold edged down 0.34% to $2,645, pressured by a stronger dollar and rising Treasury yields. Bitcoin surged 4.01%, closing above $102,200, fueled by bullish momentum and positive sentiment surrounding the cryptocurrency sector. The rally marked Bitcoin’s highest level since December 19th, signaling renewed investor appetite for digital assets.

Treasury Yield Information

The 10-year Treasury yield rose 0.46%, ending at 4.616%. Yields above 4.5% remain a headwind for equities, particularly for growth-oriented sectors. The upward pressure on yields highlights ongoing concerns about Federal Reserve policy, with investors closely monitoring upcoming economic data for potential clues on future rate decisions.

Previous Day’s Forecast Analysis

Friday’s forecast anticipated a trading range of $588 to $595 with a bullish bias above $590. SPY closed slightly above the range at $595.41, validating the bullish trajectory highlighted in the premarket analysis. The recommendation to target $594 and $595 proved accurate, as these levels served as pivotal points during the session. The analysis also cautioned against shorting too early, a sentiment echoed in Monday’s price action, which maintained strength despite testing key resistance levels. The model leaned toward a continuation of the short squeeze for today seeking failed breakdowns as triggers to entry.

Market Performance vs. Forecast

SPY’s performance on Monday closely aligned with projections as the ETF opened at $596.24, near the upper range of the forecast, and achieved a high of $599.70 before closing at $595.41. a failed breakdown at the open set up a long to major overhead resistance. The identified resistance held firm, preventing a breakout above $600. The session’s predictable movements provided profitable opportunities for traders following the outlined strategy, particularly in navigating the price action near $595 and $600.

Premarket Analysis Summary

Monday’s premarket analysis, issued at 8:56 AM, projected a long bias above $592 with a primary target of $600 and a downside limit at $587.50. The analysis emphasized waiting for clear rally points to initiate long trades, avoiding the temptation to chase price. The resistance at $600 and support at $592 played key roles in shaping the day’s strategy, guiding traders toward successful entries and exits.

Validation of the Analysis

SPY adhered to the premarket analysis, with key levels such as $592 and $595 acting as focal points during Monday’s session. The bullish bias above $592 was validated, as SPY sustained its upward momentum to test the $595 resistance. Traders who followed the recommended approach of buying dips near support capitalized on predictable price movements, reaffirming the analysis's accuracy and value.

Looking Ahead

The week ahead promises heightened volatility with key economic reports, including ISM Services on Tuesday and JOLTS and ADP Non-Farm Employment on Wednesday. These events as well as the delayed monthly Jobs Report on Friday will shape market sentiment and provide critical insights into labor market dynamics, inflation, and Federal Reserve policy. Traders should prepare for sharp price swings and significant trend developments and be prepared to trade what you see. The market is no longer on holiday and is likely to deliver significant volatility and price movement as these reports are released.

Market Sentiment and Key Levels

SPY’s close at $595.41 positions it at the midpoint between resistance at $599 and $600, with support at $592 and $591. Sentiment leans cautiously bearish after two days of a short squeeze, driven by tech sector strength. How much is left in the tank for the bulls is unknown but our model suggests the $592 to $600 range will be trap filled and choppy until a catalyst breaks price out of this range. A failure to hold $592 could prompt a move to $587 and lower while a break and close above $600 on volume has the potential to target $605 if momentum persists.

Expected Price Action

Our model forecasts a trading range of $592 to $600, with a slightly bullish bias overnight targeting $599 and $600 but with a generally bearish bias from overhead resistance. Below $591, downside targets include $587 and $585. The day is likely to feature choppy price action with brief trending periods around economic data releases. Traders should focus on opportunities near major support and resistance levels.

Trading Strategy

Long trades are favored above $592, targeting $595 and $600 while shorts near $600 may target $595, with stops above $602. Elevated VIX levels warrant cautious positioning, emphasizing disciplined risk management. Monitor key levels for failed breakout or failed breakdown signals as triggers for entries and adjust strategies accordingly as macroeconomic events unfold.

Model’s Projected Range

The model projects a maximum range of $589.25 to $600.50, with resistance at $599 and $600. SPY remains in a bear trend channel, suggesting resistance at $602.75 and support at $576.75. A break above $600 could target $605, while a decline below $591 may accelerate to $587. SPY remains below the bull trend channel from the September lows. Should price continue to trade sideways, it’s likely the bear channel holds forcing price lower. Traders should remain alert to key levels and the potential for volatile swings.

Market State Indicator (MSI) Forecast

Current Market State Overview:
The MSI is currently in a Ranging Market State, with prices closing at resistance. The range is narrow and it’s likely the MSI will rescale higher overnight. There were extended targets both above and below price today. Prior to the open the MSI rescaled higher and printed extended targets above indicating a strong bull trend. Once price reached major resistance at $600, extended targets stopped printing and price fell with the MSI rescaling lower to a ranging state then to a very narrow Bearish Trending Market State until price reached $594, where it found major support. The MSI then rescaled to a Ranging Market State where it ended the day. MSI support is $594.58 and resistance is $595.75.  
Key Levels and Market Movements:
SPY rallied overnight with the MSI rescaling to a bullish state prior to the open. Extended targets printed overnight and during the morning session until price reached $600, where it found major resistance. With extended targets printing at the open, the bulls set up the bears with a textbook failed breakdown right at the open at major support at $595. While we had to move quickly, a long from the open set up a great trade to major resistance, just below $600. Price didn’t last long at this level and just as quickly as the market moved up, the extended targets above faded setting up a mean reversion short from major resistance at the post market and premarket newsletter level of $600. Readers of this newsletter know when both the post and the premarket concur, the probabilities of success increase exponentially and traders should move all in looking for this level to hold. $600 did hold and price fell to the lows of the day from mid-morning until late in the afternoon. Our traders banked first targets at MSI support at $596, holding runners to $595. Once there, with the MSI in a very narrow range, we looked for a failed breakdown which set up perfectly late in the session. We grabbed a quick, scalp long from another level identified in the post and premarket at $594.50, closing the trade at $595.50 at the end of the day. Two monster traders with a quick scalp to close the day and once again the MSI did its job, showing us the strength of the trend and where we would find major support and resistance. Three for three today as the MSI continues to provide actionable information and levels to assist traders in staying on the right side of the market. We highly recommend integrating the MSI into your trading toolbox to maximize long-term success.
Trading Strategy Based on MSI:
The MSI currently suggests a day of consolidation on Tuesday as price is between major levels, in no man’s land. Above $600 the market will break higher and below $592 it will break lower. Between these levels price will move in a choppy, sloppy manner which should be traded from the extremes and from one level to the next. After a monster, two day short squeeze rally, price ended where it started the day, which gave the bears the edge for Tuesday. $592 must hold otherwise the bears will push prices lower quickly with little to keep SPY from falling to $587 and beyond. Should SPY retest today’s highs, $600 may give way to $601 where we favor looking for a failed breakout and bull trap which will bring price back to the $595 level. The bulls need a major push and close above $600 to reclaim control from the bears. While anything is possible, our model is leaning more bearish than bullish and recommends any rallies to $600 or a bit higher be faded. It’s likely the market takes a few days trading in this $592 to $600 range to digest the action off the lows of last week, to determine if the head and shoulders pattern on the daily chart will lead to lower prices. This is a large pattern which measures a possible decline to as low $550. While we are not forecasting this as a likely scenario, it’s important to understand what the model sees and how it may interpret market action as these patterns develop. Tuesday at 10 am ISM services will be released and in the afternoon Fed Member Barr speaks. We suggest watching the 10 am hour as well as the noon hour for the market’s reaction to these events. While probabilities suggest the market treads water on Tuesday, awaiting a major move after Friday’s jobs report, market participants may not be that patient and may react more quickly to these external catalysts. As such be prepared to trade what you see. But absent these external catalysts, Tuesday will likely see price attempt to retest today’s highs where we forecast it will once again fail. Should price move lower to $592 and hold, we favor longs to $595 but we would not initiate any longs above $595 unless price moves lower overnight first. We stated Friday probabilities “suggest price is likely decline in January but as we stated yesterday, “the bulls may have one more push above $595 before the market closes the gap at $576 and retests lower levels.” We also stated we “recommend being prepared for both higher and lower prices and use any rally to set up shorts”. Today’s rally was precisely the push higher we forecast which set up today’s perfect short trade. We continue to recommend watching the MSI for clues to help you identify the trend and key levels to trade to ensure alignment with prevailing market conditions.

Dealer Positioning Analysis

Summary of Current Dealer Positioning:
Dealers are selling $596 to $601 and higher strike Calls. They are not buying Calls nor selling Puts implying they do not believe there is much more upside on Tuesday. While price pushed a bit higher than the $598 ceiling Dealers set themselves up with on Friday, they did in fact defend this level which is what caused price to fall back to $595. To the downside for Tuesday, Dealers are buying $595 to $580 and lower strike Puts in a 1:1 ratio to the Calls they are selling, implying a neutral to slightly bullish outlook for Tuesday. This is unchanged from today suggesting price action on Tuesday, similar to today.      
Looking Ahead to Friday:
Dealers are selling $598 to $605 and higher strike Calls while buying $596 and $597 Calls indicating their desire to participate in any market rally to as high as $605 by Friday. $603 appears to be the ceiling for this week. To the downside, Dealers are buying $595 to $560 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying, reflecting a slightly bearish view for the week. This positioning has changed from neutral to slightly bearish. Dealers have been adding significant quantities of cheap out of the money protection which implies some fear of falling prices. Dealers are ready for any decline that may develop, although like Friday, they may anticipate another week of sideways to slightly up price action before anything material develops. Dealer positioning changes daily so it’s essential to monitor these daily updates for shifts in sentiment.

Recommendation for Traders

Traders should focus on executing trades at extreme levels such as $592 and $600. Long trades are favorable from $592, targeting $595 and beyond, while shorts at $600 could offer compelling opportunities targeting $595. Elevated VIX at 16.43 warrants cautious positioning, particularly in anticipation of sharp market swings. To minimize risks, traders are advised to monitor failed breakout and failed breakdown patterns and remain agile in their approach. Review premarket analysis posted before 9 AM ET to account for any changes in the model’s outlook and Dealer Positioning.

Good luck and good trading!